Announcements

GCR affirms Botswana Insurance Company Limited’s rating of AA-(BW); Outlook Stable.

Johannesburg, 14 December 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Botswana Insurance Company Limited of AA-(BW), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Botswana Insurance Company Limited of BBB-, with the outlook accorded as Stable. The ratings are valid until November 2018.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Botswana Insurance Company Limited (“BIC”) based on the following key criteria:

BIC’s rating receives substantial support from very strong capitalisation. Very strong risk adjusted capital adequacy is supported by a sizeable capital base, coupled with a comparatively low risk retention model. Accordingly, the international solvency margin remained at very high levels (FY16: 133%; FY15: 164%). A reduction in market risk, in conjunction with the gradual introduction of a well-calibrated capital management framework, is likely to sustain risk adjusted capitalisation at very strong levels over the rating horizon. Note is, however, taken of the potential for high dividend requirements at shareholder level to reduce capital buffers over the medium term.

The insurer receives further rating support from a strong competitive positioning in the short term industry. In this regard, BIC accounted for 23% of total short term industry premiums in FY16 (FY15: 21%), underpinned by strong brand recognition and well-entrenched relationships with clients. Accordingly, revenue resilience, amidst stagnation in industry premiums, was demonstrated through an 11% review year gross premium growth rate, which highlighted strong participation on limited new business prospects. In this respect, competitive positioning is expected to be maintained at strong levels.

Earnings capacity has been sustained within a moderately strong range in recent years, measuring below the very strong levels registered historically. Reduced earnings strength stems largely from underwriting profitability evidencing compression over the last three years. In this respect, the three year underwriting margin equated to 6% (FY16: 3%), compared to the prior three year cycle average of 20%. Underwriting performance contractions have been partially offset by sound investment income, with the insurer’s return on revenue averaging a still-healthy 16% over the past three years. Management expects underwriting margins to recover to strong levels in FY17 (11%), supported by improved claims and operational efficiencies, albeit with GCR’s view moderated by earnings risk stemming from recent underwriting volatility, which may persist over the medium term. However, a conservative maximum exposure per risk and event, equating to less than 1% of FY16 capital, serves to limit earnings risk.

Enhanced liquidity management maintained liquidity metrics at a moderately strong level. Cash covered net technical liabilities and average monthly claims by a higher 0.7x (FY15: 0.5x) and 14 months (FY15: 11 months) at FY16, reflecting increased liquidity preference in investment portfolio structuring and operational cash investing. GCR believes liquidity could improve to a strong range over the medium term should tactical asset re-allocation be aligned with sound risk based capital management parameters.

BIC’s revenue mix is viewed to offer the insurer a fair degree of earnings diversification. Earnings are spread almost equally across three key lines, which display sound gross premium scale. Product risk is expected to improve reflecting favourable offsetting movements in property and motor portfolios, coupled with the addition of diverse retail risks, which facilitate higher premium retention. In this respect, earnings diversification could improve over the medium term.

The international scale rating takes into account Botswana’s sovereign rating of A-, given that most of the insurer’s assets are locally domiciled, and the majority of its revenue is locally derived.

The national scale rating currently matches the national scale ceiling applicable to entities operating within the Botswana short term insurance industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. Downward rating pressure could emanate from a reduction in liquidity metrics, sustained weakening in profitability and a material reduction in capitalisation.

NATIONAL SCALE RATINGS HISTORY

 INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (December 2009) Initial rating (November 2013)
Claims paying ability: A+(BW) Claims paying ability: BBB-
Outlook: Stable Outlook: Stable
   
Last rating (December 2016) Last rating (December 2016)
Claims paying ability: AA-(BW) Claims paying ability: BBB-
Outlook: Stable Outlook: Stable

ANALYTICAL CONTACTS

Primary analyst
Godfrey Chingono
Primary Analyst
(011)784-1771
godfreyc@globalratings.net
 
Committee Chairperson
Yvonne Mujuru
Sector Head: Insurance Ratings
(011)784-1771
ymujuru@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2017

Botswana Insurance Company Limited rating reports, 2009-2016

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

Botswana Insurance Company Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to Botswana Insurance Company Limited with no contestation of the rating.

The information received from Botswana Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • The audited annual financial statements to December 2016
  • Four years of comparative audited numbers
  • Unaudited year to date results to 31 October 2017
  • Budgeted financial statements to December 2017
  • Statutory Annual Return to 31 December 2016
  • 2017 reinsurance cover notes
  • Other related documents.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Assets The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’
Balance Sheet An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.
Capacity The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Commission A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers.
Insurer The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.
Interest Money paid for the use of money.
Liquidity The ability of an insurer to convert its assets into cash to pay claims if necessary.
Loss Ratio The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.
Premium The price of insurance protection for a specified risk for a specified period of time.
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.
Reserve An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.
Retention The net amount of risk the ceding company keeps for its own account
Risk Uncertainty as to the outcome of an event when two or more possibilities exist.
Solvency With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.
Statutory Required by or having to do with law or statute.
Underwriting The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.

For a detailed glossary of terms please click here

GCR affirms Botswana Insurance Company Limited’s rating of AA-(BW); Outlook Stable.

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